CBA Recognizes Difficulties for Balance of Payments and a Number of Banks in Terms of COVID-19

Baku/01.05.20/Turan: Head of the Central Bank of Azerbaijan Elman Rustamov at a May 1 press conference recognized the difficulties in the balance of payments of the country and a number of banks in a situation where the Corona Virus pandemic negatively affects economic development in 2020.

So, in his opinion, the balance of payments deficit can reach up to 3% of GDP due to a reduction in oil exports and imports due to the COVID-19 pandemic, a certain influx of foreign currency, and a difficult situation in the service sector.

The CBA had previously forecast a surplus of 5.2% of GDP.

Commenting on the information on the restriction of the inflow of foreign currency into the country, Rustamov said: “We advised commercial banks to support the import of socially significant products for the country. These are mainly medicines and food. Of course, we had no task to prevent the influx of foreign currency.”

It is obvious that the CBA is interested in foreign currency inflow, in particular, for the other day, it agreed on a currency swap with the EBRD for $ 50 million. This operation, used in the practice of the EBRD, allows this European bank to have reliable access to manat liquidity, to lend to its customers in Azerbaijan in the national currency, and it supports the management of foreign exchange reserves for the Central Bank through additional liquidity in US dollars, which the CBA can use if necessary.

The head of the CBA believes that despite the pandemic, the country's banking sector will cope with a difficult situation.

Rustamov believes that in addition to four private banks, which revealed problems with assets and other aspects - AGBank, AmrahBank, AtaBank and NBC Bank - the situation is stable for other banks.

“The results of the analytical analysis by AGBank and NBC Bank will be announced shortly. Their investors do not have to worry, as their deposits are protected. Also, salaries are paid to those who work in these banks ... As for their possible merger, I do not see such a scenario,” the head of the CBA said.

As for the revocation of the license from Atabank OJSC and Amrahbank OJSC, the Deposit Insurance Fund was appointed liquidator on May 1 by decision of the Baku Court of Appeal.

Recall that the Central Bank on April 28 revoked the license of these two banks, revealing serious financial losses and failure to comply with the requirements of the Central Bank and depositors. Bankruptcy proceedings have been launched against them.

AtaBank OJSC was established in 1994 and was one of the 15 leading banks in Azerbaijan, and Amrahbank OJSC has been operating since 1993 and by the end of 2019, the bank’s capital amounted to only about 9 million manats with the required minimum of 50 million manats.

It is noteworthy that in these banks there were accounts of a number of entrepreneurs who are currently frozen. Answering the question of what will happen to this money, Rustamov emotionally  replied that it was necessary to choose suitable banks, in particular, reliable state banks.

Note that in relation to entrepreneurs in the banking system revealed another unpleasant nuance.

So, those businessmen who received assistance from the state as part of a package of support measures against the backdrop of COVID-19 cannot spend this money, for example, on the purchase of foreign currency.

Thus, there are unspoken restrictions associated, in particular, with foreign exchange transactions.

At the same time, on May 1, at a meeting with the media, the head of the CBA emphasized that the decision to maintain the discount rate at 7.25% (at least until June 19) “will allow banks to issue cheaper loans and reduce interest expenses of banks.”

Note that the total assets of the banking system of Azerbaijan as of March 31, 2020 amounted to 32 billion 218.9 million manats, which is 1.5% less than at the beginning of the year.

The loan portfolio is 15 billion 232.7 million manats (an increase of 2.2% compared to the end of 2019), with 61.5% accounted for by business loans (an increase of 3.7%).

The total capitalization of the country's banks is 4 billion 741 million manats (an increase of 3.4%).

Bank liabilities at the end of March 2020 amounted to 27 billion 477.9 million manats (a 2.4% decline).

The deposit portfolio in banks at the end of March amounted to 20 billion 586.6 million manats (a decline of 3.5%).

According to the results of January-March, operating profit of the banking sector of Azerbaijan amounted to 217.7 million manats (an increase of 21.6%). At the same time, in the reporting period, banks allocated 29.7 million manats (a 2.1-fold decline) to create reserves.

As of March 31, 2020, 30 banks had activity licenses in Azerbaijan, including 14 banks with foreign capital.

It is noteworthy that the bank deposits of the population in Azerbaijan (including funds of individuals engaged in individual entrepreneurial activities) in January-March 2020 decreased by 4.5% to 8 billion 251.7 million manats.

At the same time, bank deposits of the population in foreign currency during the reporting period increased by 1% to 4 billion 550 million manats or 55.1% of all deposits of the population (according to the results of 2019, the share of deposits in foreign currency amounted to about 52%).

In general, as of April 1, the volume of deposits in banks in Azerbaijan amounted to 24 billion 85.1 million manats, which is 2.7% less than at the end of 2019.

In general, as of April 1, the volume of deposits in banks in Azerbaijan amounted to 24 billion 85.1 million manats, which is 2.7% less than at the end of 2019.

The international rating agency S&P Global Ratings predicts an increase in the share of problem loans in Azerbaijani banks in 2020 to 12-15% against about 8% at the end of 2019 due to the Corona Virus COVID-19, as it will be difficult for borrowers to service their debt obligations due to economic problems.

“Risks for Azerbaijani banks, which may limit the growth rate of their business and profit indicators, are increasing. This circumstance, together with persisting external vulnerabilities, may ultimately have a more negative impact than we previously expected on the size of banks' capital reserves, the quality of their assets and the stability of their resource base,” the agency said in an assessment of Azerbaijani banks.

S&P expects that in 2020 the pace of new loans by Azerbaijani banks will slow down, and provisioning costs can grow to 4% of the average loan portfolio in the banking sector (compared with an average of 3.2% in 2015-2019). As a result, some banks will be able to demonstrate results only at the breakeven level.

Recall that earlier in April, the CBA adopted a number of regulatory measures to reduce the burden on banks and increase lending opportunities until January 1, 2021.

So, the requirement for the adequacy ratio of the total capital of system banks will be reduced from 12% to 11%, and for other banks - from 10% to 9%. The countercyclical capital buffer is reduced from 0.5% to 0%. Also postponed are additional capital requirements for consumer loans.

The CBA plans to reduce the risk coefficient of mortgage loans issued by banks at its own expense by April 1, 2020, from 100% to 50%. The CBA also recommends that banks defer the payment of dividends for 2019 until September 30, 2020 and not pay dividends for 2020.

As for macroeconomic expectations, according to the head of the CBA, inflation remains in the corridor of 4% (plus or minus 2%), which echoes the forecasts of international financial institutions.

The weak influence of the Corona Virus pandemic in the first 2 months of 2020 was reflected in the rather positive results for the banking sector in the first quarter, however, it will be the second and subsequent quarters that will be indicative.-0-